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previous page Previous Page: Publication 590 - Individual Retirement Arrangements (IRAs) - When Must You Withdraw Assets? (Required Minimum Distributions)
next page Next Page: Publication 590 - Individual Retirement Arrangements (IRAs) - What Acts Result in Penalties or Additional Taxes?
 Use previous pagenext page to find additional occurrences of topic items.Index for this Publication
taxmap/pubs/p590-012.htm#en_us_publink10006362

Are Distributions Taxable?(p40)


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previous topic occurrence Taxable Distributions next topic occurrence

In general, distributions from a traditional IRA are taxable in the year you receive them.
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Failed financial institutions.(p40)


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Distributions from a traditional IRA are taxable in the year you receive them even if they are made without your consent by a state agency as receiver of an insolvent savings institution. This means you must include such distributions in your gross income unless you roll them over. For an exception to the 1-year waiting period rule for rollovers of certain distributions from failed financial institutions, see Exception under Rollover From One IRA Into Another, earlier.
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Exceptions.(p40)


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Exceptions to distributions from traditional IRAs being taxable in the year you receive them are:
EIC
Although a conversion of a traditional IRA is considered a rollover for Roth IRA purposes, it is not an exception to the rule that distributions from a traditional IRA are taxable in the year you receive them. Conversion distributions are includible in your gross income subject to this rule and the special rules for conversions explained earlier and in chapter 2.
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Qualified charitable distributions.(p40)


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A qualified charitable distribution (QCD) is a nontaxable distribution made directly by the trustee of your IRA (other than a SEP or SIMPLE IRA) to an organization eligible to receive tax-deductible contributions. You must have been at least age 701/2 when the distribution was made. Also, you must have the same type of acknowledgement of your contribution that you would need to claim a deduction for a charitable contribution. See Records To Keep in Publication 526, Charitable Contributions. Your total QCDs for the year cannot be more than $100,000. If you file a joint return, your spouse can also have a QCD of up to $100,000. However, the amount of the QCD is limited to the amount of the distribution that would otherwise be included in income. If your IRA includes nondeductible contributions, the distribution is first considered to be paid out of otherwise taxable income.
Deposit
A qualified charitable distribution will count towards your minimum required distribution.
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Example.(p40)
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On November 1, 2008, Jeff, age 75, directed the trustee of his IRA to make a distribution of $25,000 directly to a qualified 501(c)(3) organization (a charitable organization eligible to receive tax-deductible contributions). The total value of Jeff's IRA is $30,000 and consists of $20,000 of deductible contributions and earnings and $10,000 of nondeductible contributions (basis). Since Jeff is at least age 701/2 and the distribution is made directly by the trustee to a qualified organization, the part of the distribution that would otherwise be includible in Jeff's income ($20,000) is a qualified charitable distribution (QCD). In this case, Jeff has made a QCD of $20,000 (his deductible contributions and earnings). Because Jeff made a distribution of nondeductible contributions from his IRA, he must file Form 8606, Nondeductible IRAs, with his return. Jeff includes the total distribution ($25,000) on line 15a of Form 1040. He completes Form 8606 to determine the amount to enter on line 15b of Form 1040 and the remaining basis in his IRA. Jeff enters -0- on line 15b. He also enters "QCD" next to line 15b to indicate a qualified charitable distribution. After the distribution, his basis in his IRA is $5,000. If Jeff itemizes his deductions and files Schedule A with Form 1040, the $5,000 portion of the distribution attributable to the nondeductible contributions can be deducted as a charitable contribution, subject to AGI limits. He cannot take a charitable contribution deduction for the $20,000 portion of the distribution that was not included in his income.
EIC
You cannot claim a charitable contribution deduction for any QCD not included in your income.
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Ordinary income.(p40)


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Distributions from traditional IRAs that you include in income are taxed as ordinary income.
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No special treatment.(p40)


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In figuring your tax, you cannot use the 10-year tax option or capital gain treatment that applies to lump-sum distributions from qualified employer plans.
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Distributions Fully or Partly Taxable(p40)


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previous topic occurrence Distributions Fully or Partly Taxable next topic occurrence

Distributions from your traditional IRA may be fully or partly taxable, depending on whether your IRA includes any nondeductible contributions.
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Fully taxable.(p40)


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If only deductible contributions were made to your traditional IRA (or IRAs, if you have more than one), you have no basis in your IRA. Because you have no basis in your IRA, any distributions are fully taxable when received. See Reporting and Withholding Requirements for Taxable Amounts, later.
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Partly taxable.(p40)


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If you made nondeductible contributions or rolled over any after-tax amounts to any of your traditional IRAs, you have a cost basis (investment in the contract) equal to the amount of those contributions. These nondeductible contributions are not taxed when they are distributed to you. They are a return of your investment in your IRA.
Only the part of the distribution that represents nondeductible contributions and rolled over after-tax amounts (your cost basis) is tax free. If nondeductible contributions have been made or after-tax amounts have been rolled over to your IRA, distributions consist partly of nondeductible contributions (basis) and partly of deductible contributions, earnings, and gains (if there are any). Until all of your basis has been distributed, each distribution is partly nontaxable and partly taxable.
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Form 8606.(p41)


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You must complete Form 8606, and attach it to your return, if you receive a distribution from a traditional IRA and have ever made nondeductible contributions or rolled over after-tax amounts to any of your traditional IRAs. Using the form, you will figure the nontaxable distributions for 2008, and your total IRA basis for 2008 and earlier years. See the illustrated Forms 8606 in this chapter.
Note.If you are required to file Form 8606, but you are not required to file an income tax return, you still must file Form 8606. Complete Form 8606, sign it, and send it to the IRS at the time and place you would otherwise file an income tax return.
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Figuring the Nontaxable 
and Taxable Amounts(p41)


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Nontaxable and Taxable Amounts

If your traditional IRA includes nondeductible contributions and you received a distribution from it in 2008, you must use Form 8606 to figure how much of your 2008 IRA distribution is tax free.
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Contribution and distribution in the same year.(p41)


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If you received a distribution in 2008 from a traditional IRA and you also made contributions to a traditional IRA for 2008 that may not be fully deductible because of the income limits, you can use Worksheet 1-5 to figure how much of your 2008 IRA distribution is tax free and how much is taxable. Then you can figure the amount of nondeductible contributions to report on Form 8606. Follow the instructions under Reporting your nontaxable distribution on Form 8606, next, to figure your remaining basis after the distribution.
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Reporting your nontaxable distribution on Form 8606.(p41)


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To report your nontaxable distribution and to figure the remaining basis in your traditional IRA after distributions, you must complete Worksheet 1-5 before completing Form 8606. Then follow these steps to complete Form 8606.
  1. Use Worksheet 1-2 or the IRA Deduction Worksheet in the Form 1040 or 1040A instructions to figure your deductible contributions to traditional IRAs to report on Form 1040, line 32; Form 1040A, line 17; or Form 1040NR, line 31.
  2. After you complete Worksheet 1-2 or the IRA deduction worksheet in the form instructions, enter your nondeductible contributions to traditional IRAs on line 1 of Form 8606.
  3. Complete lines 2 through 5 of Form 8606.
  4. If line 5 of Form 8606 is less than line 8 of Worksheet 1-5, complete lines 6 through 15 of Form 8606 and stop here.
  5. If line 5 of Form 8606 is equal to or greater than line 8 of Worksheet 1-5, follow instructions 6 and 7, next. Do not complete lines 6 through 12 of Form 8606.
  6. Enter the amount from line 8 of Worksheet 1-5 on lines 13 and 17 of Form 8606.
  7. Complete line 14 of Form 8606.
  8. Enter the amount from line 9 of Worksheet 1-5 (or, if you entered an amount on line 11, the amount from that line) on line 15a of Form 8606.
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Example.(p41)

Rose Green has made the following contributions to her traditional IRAs.
YearDeductibleNondeductible
2001 2,000-0-
2002 2,000-0-
2003 2,000-0-
2004 1,000-0-
2005 1,000-0-
2006 1,000-0-
2007   700 300
Totals$9,700$300
In 2008, Rose, whose IRA deduction for that year may be reduced or eliminated, makes a $2,000 contribution that may be partly nondeductible. She also receives a distribution of $5,000 for conversion to a Roth IRA. She completed the conversion before December 31, 2008, and did not recharacterize any contributions. At the end of 2008, the fair market values of her accounts, including earnings, total $20,000. She did not receive any tax-free distributions in earlier years. The amount she includes in income for 2008 is figured on Worksheet 1-5, Figuring the Taxable Part of Your IRA Distribution—Illustrated.
The Form 8606 for Rose, Illustrated, shows the information required when you need to use Worksheet 1-5 to figure your nontaxable distribution. Assume that the $500 entered on Form 8606, line 1, is the amount Rose figured using instructions 1 and 2 given earlier under Reporting your nontaxable distribution on Form 8606.
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Recognizing Losses on Traditional IRA Investments(p41)


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If you have a loss on your traditional IRA investment, you can recognize (include) the loss on your income tax return, but only when all the amounts in all your traditional IRA accounts have been distributed to you and the total distributions are less than your unrecovered basis, if any.
Your basis is the total amount of the nondeductible contributions in your traditional IRAs.
You claim the loss as a miscellaneous itemized deduction, subject to the 2%-of-adjusted-gross-income limit that applies to certain miscellaneous itemized deductions on Schedule A, Form 1040. Any such losses are added back to taxable income for purposes of calculating the alternative minimum tax.
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Example.(p42)

Bill King has made nondeductible contributions to a traditional IRA totaling $2,000, giving him a basis at the end of 2007 of $2,000. By the end of 2008, his IRA earns $400 in interest income. In that year, Bill receives a distribution of $600 ($500 basis + $100 interest), reducing the value of his IRA to $1,800 ($2,000 + $400 − $600) at year's end. Bill figures the taxable part of the distribution and his remaining basis on Form 8606 (illustrated).
In 2009, Bill's IRA has a loss of $500. At the end of that year, Bill's IRA balance is $1,300 ($1,800 − $500). Bill's remaining basis in his IRA is $1,500 ($2,000 − $500). Bill receives the $1,300 balance remaining in the IRA. He can claim a loss for 2009 of $200 (the $1,500 basis minus the $1,300 distribution of the IRA balance).
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Other Special IRA 
Distribution Situations(p42)


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Special IRA Distribution Situations

Two other special IRA distribution situations are discussed below.
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Distribution of an annuity contract from your IRA account.(p42)


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You can tell the trustee or custodian of your traditional IRA account to use the amount in the account to buy an annuity contract for you. You are not taxed when you receive the annuity contract (unless the annuity contract is being converted to an annuity held by a Roth IRA). You are taxed when you start receiving payments under that annuity contract.
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Tax treatment.(p42)
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If only deductible contributions were made to your traditional IRA since it was set up (this includes all your traditional IRAs, if you have more than one), the annuity payments are fully taxable.
If any of your traditional IRAs include both deductible and nondeductible contributions, the annuity payments are taxed as explained earlier under Distributions Fully or Partly Taxable.
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Cashing in retirement bonds.(p42)


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When you cash in retirement bonds, you are taxed on the entire amount you receive. Unless you have already cashed them in, you will be taxed on the entire value of your bonds in the year in which you reach age 701/2. The value of the bonds is the amount you would have received if you had cashed them in at the end of that year. When you later cash in the bonds, you will not be taxed again.
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Reporting and Withholding Requirements for Taxable Amounts(p42)


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Reporting and Withholding Requirements for Taxable Amounts

If you receive a distribution from your traditional IRA, you will receive Form 1099-R, or a similar statement. IRA distributions are shown in boxes 1 and 2a of Form 1099-R. A number or letter code in box 7 tells you what type of distribution you received from your IRA.
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Number codes.(p42)


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Some of the number codes are explained below. All of the codes are explained in the instructions for recipients on Form 1099-R.
EIC
If code 1, 5, or 8 appears on your Form 1099-R, you are probably subject to a penalty or additional tax. If code 1 appears, see   Early Distributions, later. If code 5 appears, see Prohibited Transactions, later. If code 8 appears, see Excess Contributions, later.
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Letter codes. (p42)


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Some of the letter codes are explained below. All of the codes are explained in the instructions for recipients on Form 1099-R.
If the distribution shown on Form 1099-R is from your IRA, SEP IRA, or SIMPLE IRA, the small box in box 7 (labeled IRA/SEP/SIMPLE) should be marked with an "X."
EIC
If code D, J, P, or S appears on your Form 1099-R, you are probably subject to a penalty or additional tax. If code D appears, see Excess Contributions, later. If code J appears, see Early Distributions, later. If code P appears, see Excess Contributions, later. If code S appears, see Additional Tax on Early Distributions in chapter 3.
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Withholding.(p43)


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Federal income tax is withheld from distributions from traditional IRAs unless you choose not to have tax withheld.
The amount of tax withheld from an annuity or a similar periodic payment is based on your marital status and the number of withholding allowances you claim on your withholding certificate (Form W-4P). If you have not filed a certificate, tax will be withheld as if you are a married individual claiming three withholding allowances.
Generally, tax will be withheld at a 10% rate on nonperiodic distributions.
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IRA distributions delivered outside the United States.(p43)
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In general, if you are a U.S. citizen or resident alien and your home address is outside the United States or its possessions, you cannot choose exemption from withholding on distributions from your traditional IRA.
To choose exemption from withholding, you must certify to the payer under penalties of perjury that you are not a U.S. citizen, a resident alien of the United States, or a tax-avoidance expatriate.
Even if this election is made, the payer must withhold tax at the rates prescribed for nonresident aliens.
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More information.(p44)
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For more information on withholding on pensions and annuities, see Pensions and Annuities in chapter 1 of Publication 505, Tax Withholding and Estimated Tax. For more information on withholding on nonresident aliens and foreign entities, see Publication 515, Withholding of Tax on Nonresident Aliens and Foreign Entities.
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Reporting taxable distributions on your return.(p44)


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Report fully taxable distributions, including early distributions, on Form 1040, line 15b (no entry is required on line 15a); Form 1040A, line 11b (no entry is required on line 11a); or Form 1040NR, line 16b (no entry is required on line 16a). If only part of the distribution is taxable, enter the total amount on Form 1040, line 15a; Form 1040A, line 11a; or Form 1040NR, line 16a, and enter the taxable part on Form 1040, line 15b; Form 1040A, line 11b; or Form 1040NR, line 16b. You cannot report distributions on Form 1040EZ or Form 1040NR-EZ.
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Estate tax.(p45)


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Generally, the value of an annuity or other payment receivable by any beneficiary of a decedent's traditional IRA that represents the part of the purchase price contributed by the decedent (or by his or her former employer(s)), must be included in the decedent's gross estate. For more information, see the instructions for Schedule I, Form 706, United States Estate (and Generation-Skipping Transfer) Tax Return.
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taxmap/pubs/p590-012.htm#TXMP1582268a
Form 8606 - Rose Green Text DescriptionForm 8606 - Rose Green  
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taxmap/pubs/p590-012.htm#TXMP62851620
Form 8606 - Page 2 - Rose Green Text DescriptionForm 8606 - Page 2 - Rose Green  
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Worksheet 1-5. Figuring the Taxable Part of Your IRA Distribution

Use only if you made contributions to a traditional IRA for 2008 and have to figure the taxable part of your 2008 distributions to determine your modified AGI. See Limit if Covered by Employer Plan.
Form 8606 and the related instructions will be needed when using this worksheet.

Note. When used in this worksheet, the term outstanding rollover refers to an amount distributed from a traditional IRA as part of a rollover that, as of December 31, 2008, had not yet been reinvested in another traditional IRA, but was still eligible to be rolled over tax free.

1.Enter the basis in your traditional IRAs as of December 31, 20071.            
2.Enter the total of all contributions made to your traditional IRAs during 2008 and all contributions made during 2009 that were for 2008, whether or not deductible. Do not include rollover contributions properly rolled over into IRAs. Also, do not include certain returned contributions described in the instructions for line 7, Part I, of Form 8606. 2.            
3.Add lines 1 and 23.            
4.Enter the value of all your traditional IRAs as of December 31, 2008 (include any outstanding rollovers from traditional IRAs to other traditional IRAs). Subtract any repayments of qualified disaster recovery assistance or recovery assistance distributions 4.            
5.Enter the total distributions from traditional IRAs (including amounts converted to Roth IRAs that will be shown on line 16 of Form 8606) received in 2008. (Do not include outstanding rollovers included on line 4 or any rollovers between traditional IRAs completed by December 31, 2008. Also, do not include certain returned contributions described in the instructions for line 7, Part I, of Form 8606.) Include any repayments of qualified disaster recovery assistance or recovery assistance distributions 5.            
6.Add lines 4 and 56.            
7.Divide line 3 by line 6. Enter the result as a decimal (rounded to at least three places).
If the result is 1.000 or more, enter 1.000
7.            
8.Nontaxable portion of the distribution.
Multiply line 5 by line 7. Enter the result here and on lines 13 and 17 of Form 8606
8.            
9.Taxable portion of the distribution (before adjustment for conversions).
Subtract line 8 from line 5. Enter the result here and if there are no amounts converted to Roth IRAs, stop here and enter the result on line 15a of Form 8606
9.            
10.Enter the amount included on line 9 that is allocable to amounts converted to Roth IRAs by December 31, 2008. (See Note at the end of this worksheet.) Enter here and on line 18 of Form 8606 10.            
11.Taxable portion of the distribution (after adjustments for conversions).
Subtract line 10 from line 9. Enter the result here and on line 15a of Form 8606
11.            
Note. If the amount on line 5 of this worksheet includes an amount converted to a Roth IRA by December 31, 2008, you must determine the percentage of the distribution allocable to the conversion. To figure the percentage, divide the amount converted (from line 16 of Form 8606) by the total distributions shown on line 5. To figure the amounts to include on line 10 of this worksheet and on line 18, Part II of Form 8606, multiply line 9 of the worksheet by the percentage you figured.


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Worksheet 1-5. Figuring the Taxable Part of Your IRA Distribution—Illustrated

Use only if you made contributions to a traditional IRA for 2008 and have to figure the taxable part of your 2008 distributions to determine your modified AGI. See Limit if Covered by Employer Plan.
Form 8606 and the related instructions will be needed when using this worksheet.

Note. When used in this worksheet, the term outstanding rollover refers to an amount distributed from a traditional IRA as part of a rollover that, as of December 31, 2008, had not yet been reinvested in another traditional IRA, but was still eligible to be rolled over tax free.

1.Enter the basis in your traditional IRAs as of December 31, 20071.300
2.Enter the total of all contributions made to your traditional IRAs during 2008 and all contributions made during 2009 that were for 2008, whether or not deductible. Do not include rollover contributions properly rolled over into IRAs. Also, do not include certain returned contributions described in the instructions for line 7, Part I, of Form 8606. 2.2,000
3.Add lines 1 and 23.2,300
4.Enter the value of all your traditional IRAs as of December 31, 2008 (include any outstanding rollovers from traditional IRAs to other traditional IRAs). Subtract any repayments of qualified disaster recovery assistance or recovery assistance distributions 4.20,000
5.Enter the total distributions from traditional IRAs (including amounts converted to Roth IRAs that will be shown on line 16 of Form 8606) received in 2008. (Do not include outstanding rollovers included on line 4 or any rollovers between traditional IRAs completed by December 31, 2008. Also, do not include certain returned contributions described in the instructions for line 7, Part I, of Form 8606.) Include any repayments of qualified disaster recovery assistance or recovery assistance distributions 5.5,000
6.Add lines 4 and 56.25,000
7.Divide line 3 by line 6. Enter the result as a decimal (rounded to at least three places).
If the result is 1.000 or more, enter 1.000
7..092
8.Nontaxable portion of the distribution.
Multiply line 5 by line 7. Enter the result here and on lines 13 and 17 of Form 8606
8.460
9.Taxable portion of the distribution (before adjustment for conversions).
Subtract line 8 from line 5. Enter the result here and if there are no amounts converted to Roth IRAs, stop here and enter the result on line 15a of Form 8606
9.4,540
10.Enter the amount included on line 9 that is allocable to amounts converted to Roth IRAs by December 31, 2008. (See Note at the end of this worksheet.) Enter here and on line 18 of Form 8606 10.4,540
11.Taxable portion of the distribution (after adjustments for conversions).
Subtract line 10 from line 9. Enter the result here and on line 15a of Form 8606
11.0
Note. If the amount on line 5 of this worksheet includes an amount converted to a Roth IRA by December 31, 2008, you must determine the percentage of the distribution allocable to the conversion. To figure the percentage, divide the amount converted (from line 16 of Form 8606) by the total distributions shown on line 5. To figure the amounts to include on line 10 of this worksheet and on line 18, Part II of Form 8606, multiply line 9 of the worksheet by the percentage you figured.